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Second Circuit Finds Vessel Liable in rem for Damage to Cargo

On December 6, 2012, the United States Court of Appeals for the Second Circuit issued its decision in MAN Ferrostaal, Inc., v.M/V AKILI, et al., holding that a vessel  is liable in rem for damage to its cargo under maritime common law.  The M/V AKILI, its owner, Akela Navigation Co. ("Akela"), and manager, Almi Marine Management (Almi"), appealed the District Court's decision arguing that the court erred in holding: 1) the M/V AKILI liable in rem for damage to a cargo of "thin-walled" steel pipes shipped aboard the vessel; and 2) the Carriage of Goods by Sea Act ("COGSA") applied to the vessel as a "carrier" under that act.  MAN Ferrostaal ("Ferrostaal") cross-appealed the District Court's finding that Akela and Almi were not liable in personam for damage to Ferrostaal's cargo under a bailment theory.  Although the Second Circuit's analysis of the issues differed from that of the District Court, the Circuit Court ultimately affirmed the District Court's ruling.
 
In this case, a series of charters and sub-charters of the M/V AKILI were executed before the steel cargo was loaded onboard.  The original Time Charter Party specified that all bills of lading issued under the charter would incorporate "the General Clause Paramount or U.S. or Canadian Clause Paramount whichever applicable as attached."  The USA Clause Paramount is a clause designating COGSA as the controlling law with respect to the rights and liabilities of parties to a bill of lading.  Defendant, S.M. China, sub-chartered the M/V AKILI for a voyage from Shanghai to Houston and then to New Orleans.  Prior to chartering the M/V AKILI, S.M. China had executed a part-cargo charter with Ferrostaal for the carriage of the steel pipes from Shanghai to New Orleans.  This part-cargo charter also contained a "Clause Paramount," which stated in part that "any claims for loss or damage to cargo shall be governed by the Hague-Visby rules as if comprehensively applicable by law." The Hague-Visby rules are an international convention, which (in all pertinent respects) are literally identical to the rules established by COGSA.  This is no coincidence as the convention requires signatory countries to pass legislation embodying these rules.  Upon the vessel's arrival in New Orleans, it was discovered that the steel pipes were improperly stowed at the bottom of the cargo hold underneath a separate heavier pipe cargo. 
 
On July 9, 2007, Ferostaal filed an action in rem against the M/V AKILI and in personam against Akela, Almi, and S.M. China in the United States District Court for the Southern District of New York.  On February 9, 2009, Ferrostaal made an emergency motion to sever the in rem action and transfer it to the Eastern District of Louisiana as the M/V AKILI was expected to call a Louisiana port and the vessel represented the basis for in rem jurisdiction.   In order to avoid the vessel's arrest, Akela's insurers posted a Letter of Undertaking.  Pursuant to a Stipulation and Consent Order, the parties agreed in rem jurisdiction was appropriate and all claims would be tried on the merits in New York.  After a bench trial, Judge Cote used a combination of maritime law and COGSA to find the M/V AKILI liable in rem, holding that because the M/V AKILI set sail with the cargo, it was deemed to have ratified the bill of lading, and therefore is liable in rem as a COGSA carrier.
 
In reaching its decision, the Second Circuit found that a vessel's in rem liability for damage to cargo exists under maritime common law, not COGSA, for a violation of a carrier's contractual or statutory obligations.  Well before the enactment of COGSA and its predecessor, the Harter Act, maritime law held ships liable in rem for cargo damage due to improper stowage.  In rem liability is derived from a pre-COGSA maritime law doctrine known as "implied ratification," which finds that once cargo is aboard a vessel, the vessel is deemed to have impliedly ratified the underlying contract of affreightment and is answerable for nonperformance.  The "implied ratification" doctrine is directly traceable to pre-COGSA maritime law precedent and does not render a vessel a carrier under COGSA.  The Court determined that COGSA assumes the existence of the in rem proceeding rather than creates it.   COGSA was meant to modify, not displace, in rem liability under maritime law.  In short, even if a vessel is not a "carrier" within the meaning of COGSA, maritime law renders vessels liable in rem for a carrier's violations of its obligations.
 
The Second Circuit also affirmed the District Court's decision to dismiss Ferrostaal's in personam claims against Akela and Almi.  In order to recover for damage to cargo under a bailment theory, there must be a bailment relationship between the claimant and the ship owner or manager.  The Court found that neither Akela nor Almi authorized S.M. China to issue bills of lading on their behalf.  In addition, Ferrostaal could not have believed such authorization existed when the bill of lading named only S.M. China as carrier.  S.M. China remained responsible for delivery of the goods and maintained exclusive control and custody over the cargos through the agents it hired.  Accordingly, both Akela and Almi were not liable in personam for the cargo damage under a bailment theory.

Read a copy of the Second Circuit's Decision

For more information about in rem vessel claims, COGSA claims or maritime common law principles, please do not hesitate to contact us at info@chaloslaw.com.

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